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NY Attorney General Settles Investigation into Patent Troll

Attorney General Eric T. Schneiderman announced earlier today that a groundbreaking settlement was reached with MPHJ Technology Investments, LLC, a patent troll according to Schneiderman. Schneiderman’s investigation focused on MPHJ’s use of deceptive and abusive tactics when it contacted hundreds of small and medium-sized New York businesses in an effort to get them to pay for patent licenses characterized as being of dubious value.

“So-called ‘patent trolls’ exploit loopholes in the patent system and have become a scourge on the business community,” said Attorney General Schneiderman.“They drain critical resources from small and medium-sized businesses that would otherwise be available for reinvestment and job creation, which are sorely needed across New York. State law enforcement can’t cure all the ills of the federal patent system, but the guidelines established in today’s settlement will put an end to some of the most abusive tactics by placing the industry on notice that these deceptive practices will not be tolerated in New York.”

Law Professor Robin Feldman, the Director of the Institute of Innovation Law at the University of California Hastings College of Law and a frequent contributor to IPWatchdog.com, said this of the announced settlement: “Misrepresentation and downright fraud have become a major problem with patents, particularly against vulnerable targets like individuals and small businesses. Today’s historic New York settlement agreement strikes at the heart of this inappropriate behavior while protecting the legitimate exercise of patent rights. The agreement provides a model for other states, and for federal regulators as well.”

Professor Feldman testifying before House Committee on Energy & Commerce.

I agree this is an important moment in the battle against destructive and abusive patent litigation and pre-litigation tactics. I also believe that Professor Feldman is accurate when she says that this investigation and subsequent settlement provide a blueprint for dealing with the patent troll problem. Having said that, I’d rather take a far more nuanced position than did Attorney General Schneiderman. Unfortunately, in his announcement the Attorney General goes too far. What he says means that virtually all patent owners are patent trolls. He also suggests that engaging in legal, authorized activity under the patent laws could subject one to investigation, which is obviously a dangerous precedent; one that is hardly necessary to justify what appear to be entirely appropriate actions taken against MPHJ.

Although I do think it is relatively clear that MPHJ engaged in activities that justifiably earn for itself the characterization of a patent troll, the Attorney General goes farther than necessary to call out and punish this bad actor. For example, the following paragraph defining patent trolls was included in the press release issued by Schneiderman’s Office:

Patent trolls – sometimes referred to as “patent assertion entities” – are not innovators. They buy patents owned by others and then try to turn a profit by aggressively pursuing businesses they claim infringe the acquired patents. In virtually all cases, the businesses targeted by patent trolls did not copy other companies’ technology. Instead, patent trolls argue that that independently developed technology or business processes used by the target – and in some cases, everyday business activities – require a license linked to the troll’s patents. MPHJ, for example, contends that most businesses that use an ordinary commercial scanner on a computer network with an everyday email system will infringe its patents.

The problem with this statement is that the Attorney General is vilifying those that acquire patents and seek to enforce them without regard to whether what they are doing is abusive. It seems that the Attorney General is taking the position that it is condemnable to acquire patents and then enforce them against those who did not copy but rather independently created. The problem is that this is simply not true. While independent creation is a recognized defense in copyright infringement proceedings, independent creation is not and never has been a defense in patent infringement cases.

The fact that one independently created does not mean they are not infringing a patent. From a legal standpoint it is wholly irrelevant whether the defendant independently created. It really has to be that way or there would be absolutely no incentive to invest the millions and sometimes billions of dollars necessary to uncover the innovation in the first place, which many times requires extraordinary and pioneering breakthroughs in the fields of science or engineering. Therefore, it is wholly inappropriate and quite dangerous to vilify what is completely legal activity. To the extent that the Attorney General is grandstanding to acquire attention we can debate whether that is appropriate, but it is simply not acceptable to the extent he is saying that his Office will seek to punish wholly legal activity.

Furthermore, by the definition of patent troll presented by Schneiderman he is condemning virtually every major technology company in the world. Under this definition Google, Apple, Cisco, Microsoft, and many others are patent trolls. Those companies, just like the nefarious actors who deserve to be labeled patent trolls, acquire patents. These entities all have advanced licensing regimes that seek to license patents to those who they say infringe. In many cases those that are asked to take a license claim to be and are independent creators. But under the patent laws enacted by Congress it has never been a defense to claim you independently created because copying is not a prerequisite to infringement of a patent. Further, under Schneiderman’s definition even one of the most innovative companies of this or any other era, IBM, would be a patent troll because they acquire patents for the purpose of seeking licenses. So a definition that captures every technology company in the world and defines them as a patent troll simply can’t be correct.

This is not to say, however, that the action taken against MPHJ was not condemnable. It seems as if the action taken by the New York Attorney General was wholly justified because MPHJ engaged in abusive pre-litigation tactics with the intent to deceive those receiving demand letters, scaring them into settling.

MPHJ employed a strategy of targeting small and medium-sized businesses, which in and of itself is not legally problematic. The fact that MPHJ acquired patents of dubious validity is interesting, but again, patents are presumed valid, so that is not terribly probative either. The problem with the MPHJ strategy is that it was deceptive. They sent out letters to a large number of small businesses in an effort to extract small, nuisance-value license payments from them. Indeed, some patent trolls seek far less than even a fair nuisance-value, asking for $500 or $1,000. It is this type of behavior that is the hallmark of a patent troll. The mere fact that one has acquired patents and seeks to license them is in and of itself irrelevant because that activity is completely legal.

In the letters sent by MPHJ hundreds of New York businesses were told that it was “likely” that they were infringing MPHJ patents and, therefore, needed to take a patent license. By saying that they were “likely” infringing an impression was created that MPHJ had conducted at least some kind of individualized analysis of the targeted company’s business. But MPHJ did no investigation, choosing merely sent out form letters in bulk to companies of a certain size and industry classification. There was no way MPHJ could have legitimately made the assertion that the businesses receiving the letters were “likely” infringing. Furthermore, MPHJ falsely stated in the letters that most other businesses approached had paid a fee to acquired licenses when in fact very few businesses had actually paid to acquire licenses. MPHJ also provided misleading information about the fees that the few businesses accepting licenses had paid.

The Attorney General also cited MPHJ for falsely threatening to sue hundreds of businesses if they did not respond to its letters within two weeks. The Attorney General explained that MPHJ never filed any patent lawsuits against a New York business. While I have issues with the other false and misleading statements made in the letters, such as the reference to a likelihood there was infringement despite no investigation, I find it impossible to believe that threats to sue that are not acted upon are in some way a deceptive activity that the government needs to concern itself with. If a threat to sue that is not followed up on creates a legally actionably wrong then the Attorney General had better hire far more staff and get ready to go after tens of thousands of businesses and lawyers. I’m not saying it is smart to issue these kinds of blanket threats, and it is rather poor practice to make a threat and then there be absolutely no consequences to follow, but it seems naive not to understand that such threats are a dime a dozen.

This brings me full circle. Why is it necessary to overstate who is a patent troll? Why is it necessary to vilify completely legal activity associated with acquiring and enforcing patents? Why would the government take it upon itself to police every over-blown threat to sue? It is enough to recognize that the activity that makes one a patent troll is the use of a patent as part of an overall abusive litigation or pre-litigation strategy. The entire industry does not need to be condemned or vilified. So why? Such exaggerated and legally inaccurate statements smack of grandstand for the media, or as an attempt to vilify all patent owners and destroy the patent system as we know it.

Kudos to New York Attorney General Schneiderman for setting in place a blueprint that others can follow, if the desire, to put an end to abusive pre-litigation tactics. This is a far better model than anything Congress has or will consider.

Shame on the Attorney General Schneiderman for vilifying patent owners generally and suggesting that wholly legal activities somehow make one a patent troll. How and why a patent has been acquired is simply irrelevant to the inquiry. The only relevant inquiry is whether the alleged patent troll is using a patent as a way to exploit judicial inefficiencies to engage in an extortion-like shakedown. Given the deceptive and false statements made and the lack of even a modicum of investigation it seems the MPHJ strategy was what some federal courts have characterized as extortion-like activity. Recognizing that abuse of the litigation process is unacceptable is enough to clean up the industry. We need not go further than that.

The Author

Gene Quinn
is a Patent Attorney and Editor and founder of IPWatchdog.com. Gene is also a principal lecturer in the PLI Patent Bar Review Course and an attorney with Widerman Malek. Gene’s specialty is in the area of strategic patent consulting, patent application drafting and patent prosecution. He consults with attorneys facing peculiar procedural issues at the Patent Office, advises investors and executives on patent law changes and pending litigation matters, and works with start-up businesses throughout the United States and around the world, primarily dealing with software and computer related innovations. Gene is admitted to practice law in New Hampshire, is a Registered Patent Attorney and is also admitted to practice before the United States Court of Appeals for the Federal Circuit. CLICK HERE to send Gene a message.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 23 Comments comments.

EGJanuary 14, 2014 3:22 pm

“Unfortunately, in his announcement the Attorney General goes too far.”

Gene,

Consider the source. State AGs are as much politicians as they are supposedly lawyers. That’s very unfortunate. And the NY State AGs are, in my opinion, notoriously over aggressive in what they say, and how they pursue what they perceive as “consumer protectionism.”

Gene QuinnJanuary 14, 2014 3:50 pm

EG-

I agree. If he had simply stuck to the fact that MPHJ engaged in deceptive and abusive pre-litigation tactics this would be perfectly fine. I still think this is a good model for moving forward against the bad actors. It is just unfortunate that this positive event will no doubt be used in the popular press to further vilify legitimate activities even if that is not what was at the heart of this action/investigation.

-Gene

AnonJanuary 14, 2014 4:51 pm

Will links to the blueprints be forthcoming?

Gene QuinnJanuary 14, 2014 5:29 pm

Anon-

What do you mean?

I think the blueprint is this: If someone is using misrepresentations and deceit to attempt to force settlements they are engaging in activity that State Attorney Generals can and probably should go after.

I also personally like the precedent set here that acknowledges that saying “you are likely an infringer” requires at least a modicum of investigation.

I also think that once you get past the overstatements in the press release Professor Feldman’s characterization of the settlement agreement itself is accurate. This allows legitimate patent activity without hinderance.

Hmm…. if being an entity who acquires a patent, rather than inventing the patented invention makes one a troll, then every patent-owning corporation is a troll. No corporation can invent anything, only humans.

AnonJanuary 15, 2014 10:06 am

Well then, American Cowboy, the next ‘logical’ step will be to outlaw ALL patents that are not purely strictly and only owned or supported by individual owners.

Of course, the (un?)intended consequences of such ‘logic’ would be that enforcement of patent rights would largely cease to exist and the forces that wish to dismantle the patent system will have succeeded while leaving the doors of the patent office open.

And who cares if the notion of property rights is trampled upon? Who cares that alienability must be sacrificed?

(of course, you should realize that I and a great many other people do care)

a cease-and-desist letter crosses the line. It’s one thing to file suit for violation of the Consumer Protection Act as Vermont has done or to threaten to sue and negotiate a settlement as Minnesota and New York have done, presumably all showing sufficient evidence of deceptive practices. It’s another thing to send a cease-and-desist letter.

Ralph AlbrechtJanuary 16, 2014 9:43 am

Maybe the good NY AG will take it upon himself to speak with IBM Corp., the biggest licensing entity in the world, (rhetorically, how many PCs does it sell today? that would be zero) and conveniently founded and headquartered in his great state. IBM would, I am sure, be happy to educate his honor about federal patent law.

Gene QuinnJanuary 16, 2014 10:33 am

Richard-

I’m rather surprised you have an issue with what NY did.

The problem with Vermont is that the law they have enacted is clearly unconstitutional. There is absolutely no chance it will stand once it is litigated.

-Gene

Far Cold NorthJanuary 16, 2014 1:39 pm

While I have no quarrel with what the NY AG did, I do question the statement:

“independent creation is not and never has been a defense in patent infringement cases.”

Did not the AIA provide for a “prior use defense?” Specifically, a party may defend a patent infringement suit by establishing it commercially used, in good faith, a process, machine, manufacture, or composition of matter that is asserted to infringe the patent at least 1 year before the effective filing date of the claimed invention, or the date on which the claimed invention was disclosed to the public (whichever is earlier).

Gene QuinnJanuary 16, 2014 3:01 pm

Far Cold-

You are correct. The AIA does allow for a prior user defense. I believe the way that “independent creation” was used here was as an argument that if one independently creates after you invent then it must have been obvious.

The NY AG said: “patent trolls argue that that independently developed technology or business processes used by the target – and in some cases, everyday business activities – require a license…”

As a matter of black letter patent law those that independently create are infringing if the claim is valid (i.e., the independent creation is not prior art) and there is not a valid prior user right. Prior user rights are still exceptionally narrow though. I don’t get the sense that this level of nuanced understanding of patent law was what he was referring to.

-Gene

angry dudeJanuary 16, 2014 3:27 pm

The very notion of “independent” creation by an accused infringer after patent application is officially published on the USPTO website for everyone in the world to see is simply laughable today (provided that patent that may eventually issue is a valid patent – new and unobvious)

American CowboyJanuary 17, 2014 9:47 am

I have no doubt that some infringers are marketing the product of their independent creation. That constitutes infringement, entitling the patentee to damages, and, if the right to exclude means anything at all, an injunction.

if the infringer is a copier, then they are a willful infringer, and the patentee should get treble damages and attorneys fees, if the proof is strong enough.

Bear in mind, that the patentee is entitled to a patent ONLY if his invention is novel, even as to prior art he does not know about. That is, if he independently creates and applies for a patent, but the examiner finds prior art that the applicant did not know about, he is still denied a patent. He gets no benefit from being an independent creator, just as the infringer gets no benefit from being an independent creator.

Those features of patent law make it distinct from copyright law, where the copyright owner need only be an independent creator and not a copier, and the would-be infringer escapes liability if he convinces the fact-finder that he is an independent creator and not a copier.

AnonJanuary 17, 2014 11:37 am

Well said American Cowboy.

Richard FalkJanuary 18, 2014 10:24 pm

Gene,

I do not have an issue with what NY did and I agree that some of the AGs comments are hyperbole. I wrote what I did only to show that there are boundaries to what can be done or proper vs. improper (or legal vs. illegal) ways to reign in abusive behavior. What was done in Nebraska was done improperly. As for Vermont, it doesn’t look like the law is specifically against certain entity types (which would be illegal) but rather defines behavior or conduct for Courts to consider (something similar to some proposed legislation in Congress). See the following (for the second link to the law itself, skip the propane section to get to the “bad faith assertions” section):

I don’t see what part of the law is so clearly unconstitutional, but then I’m not a lawyer so what do I know. We’ll see what the Courts say about the Vermont law, unless there is a settlement before a ruling.

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